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26 April, 18:08

Sam and Drew are equal partners in SD LLC formed on June 1 of the current year. Sam contributed land that he inherited from his uncle in 2013. Sam's uncle purchased the land in 1986 for $30,000. The land was worth $100,000 when Sam's uncle died. The fair market value of the land was $200,000 at the date it was contributed to the LLC.

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  1. 26 April, 19:05
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    a) the gain or income to be recognized by Sam is zero

    b) Since the worth of the property is $100,000, Sam's basis is 100,000

    Explanation:

    c) The incometo be recognized by Drew on the formation of the LLC is $50,000

    d) Drew's basis of interest in the LLC is $200,000

    First, the question is completed below:

    Drew has significant experience developing real estate. After the LLC is formed, he will prepare a plan for developing the property and secure zoning approvals for the LLC. Drew would normall bill a third party $50,000 for these efforts. Drew will also contributed $150,000 cash in exchange for his 50% interest in the LLC. The value of his 50% interest is $200,000.

    a) How much gain or income will Sam recognize on his contribution of the land to the LLC? What is the character of any gain or income recognized?

    b) What basis will Sam take in his LLC interest

    c) How much gain or income will Drew recognize on the formation of the LLC? What is the character of any gain or income recognized?

    d) What basis will Drew take in his LLC interest?

    Solution

    a) the gain or income to be recognized by Sam is zero. This is because no gain is allowed to be recognized by any member of a LLC where property is contributed to the LLC as a means of exchange for interest in the company

    b) Sam's basis in his LLC interest will be equal to the value of the property he inherited from his uncle. Since the worth of the property is $100,000, Sam's basis is 100,000

    c) The incometo be recognized by Drew on the formation of the LLC is $50,000 (the amount he normally bills for the effort) as the fair market value of his interest in the LLC is $200,000

    It should be noted that this income recognized will be deducted from the fair value of his interest, so Drew will only contribute property worht $200,000 - $50,000 to the LLC

    d) Drew's basis of interest in the LLC is $200,000

    calculaed as Cash contributed (150,000) + orodinary income recognized ($50,000) = $200,000
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